U.S. stocks pare loss as worries about labor market persist

KristinaPeterson

NEW YORK (MarketWatch) -- U.S. stocks finished well off earlier lows on Friday, leaving intact strong weekly gains, as investors re-assessed news of worse-than-expected job losses in July amid hopes that the Federal Reserve might next week hint at new steps to boost the economy.

The Dow Jones Industrial Average
INDU, +0.00%
fell 21.42 points, or 0.2%, to end at 10,653.56. The blue-chip index recovered much of a 160-point morning drop to gain 1.8% during a week of light volumes.

Investors piled into Treasurys after the release of the government's monthly jobs data, pushing the yield on the 10-year note to its lowest level in more than a year. Read about Treasury bonds.

Also weighing Friday was a decline in consumer credit amid increased saving by American households. Consumer credit outstanding fell 0.7% in June, while the national savings rate rose to 6.4% from 6.3% in May, the Federal Reserve said in a report late Friday.

The Nasdaq Composite
COMP, +0.08%
pared its losses to end 0.2% lower at 2288.47, while the Standard & Poor's 500-stock index
SPX, -0.18%
finished down 0.4% at 1,121.64, hovering around its 200-day moving average after falling below it earlier in the day.

The jobs report, which showed nonfarm payrolls fell by a larger-than-expected 131,000 last month, added to a stream of economic data over recent weeks that indicate the American recovery continues to weaken, and stoked fears the country could still fall back into a recession. See more on payrolls.

"We were hoping for good news, and we just didn't get it," said Maris Ogg, president of Tower Bridge Advisors. Stocks are near historical lows in terms of valuation, "but it's hard for me to see how we get much outside this trading range with the uncertainty we have out there," she said, pointing to the jobs outlook and Congressional uncertainty over extending tax cuts.

Compounding worries is that consumer spending, which makes up 70% of economic activity, could further erode in the face of persistently high unemployment rates. And investors remain wary about how the weak job numbers will influence the Federal Reserve's decision at next week's meeting whether to alter its strategy for managing its $1.1-trillion portfolio of mortgage-backed securities or take other measures to spur the economy.

"The Fed will be focused like a laser beam on the jobs situation," said Stephen Wood, chief market strategist at Russell Investments. But he added that the economic recovery is "going to be like running on the beach with boots on."

Treasurys rallied as demand for the safe-haven assets surged. The 10-year Treasury note rose, pushing its yield
TMUBMUSD10Y, -0.46%
down to 2.824%, hitting its lowest level since April 2009. The stock slide has "breathed new life into the 10-year," said Kevin Flanagan, fixed income strategist for global wealth management with Morgan Stanley.

The dollar hit its 2010 low against the yen and weakened against the euro. After piercing $1.33 to a three-month high, the euro
EURUSD, +0.2479%
was trading recently around $1.3290, up from $1.3186 late Thursday in New York. The U.S. Dollar Index
DXY, -0.18%
which tracks the U.S. currency against a basket of six others, shed 0.6%. Read about the dollar, euro.

Gold prices rose above the $1,200 psychological benchmark as investors moved to the perceived safety of the metal. The U.S. dollar, which weakened after the jobs report, is further helping the dollar-denominated metal by making it less expensive for buyers using other currencies. Read about gold.

European markets lost earlier gains on encouraging earnings from European banking and insurance groups. The Europe Stoxx 600 (SXXP) closed down 1.1%, turning negative in the wake of the U.S. jobs report. See Europe Markets.

Stocks tend to move more dramatically when volume is light, as it was on the U.S. exchanges Friday, with 3.1 billion shares changing hands in New York Stock Exchange Composite volume. Traders said there were few incentives to stake out new positions ahead of the weekend, especially in the wake of such disappointing data.

"We're two years into this recession, and we're not getting any better -- we can't even add jobs," said Dave Rovelli, managing director of equity trading at Canaccord Adams. "Companies are doing well because they've slimmed down, but they're not hiring."

Nonfarm payrolls fell by 131,000 last month, more than the drop of 60,000 economists had expected, the Labor Department said Friday. Only 71,000 private-sector jobs were added last month. The government also revised lower June's data to reflect a payrolls drop of 221,000, more than the 125,000 decline previously reported.

Among stocks in focus, AIG
AIG, -0.98%
rose 2.6% as the company's insurance business generated an operating profit, though the bailed-out insurance behemoth swung to a second-quarter loss after taking a $3.3 billion write-down on the operations set to be sold to MetLife
MET, -0.91%See more on AIG.

Kraft Foods
KFT
gained 2.4% after reporting a 13% jump in its second-quarter profit as its new Cadbury business helped drive sales in developing markets in Asia and Latin America. Earnings topped Wall Street's expectations and Kraft affirmed its 2010 earnings outlook. Read more on Kraft.

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